INCOME TAX

Section 194C of the Income-tax Act, 1961--Deduction of tax at source from payment made to contractors and sub-contractors--Instruction regarding.

Circular No. 632

Dated 20/8/1992

Reference is invited to Board's Circular No.613 [F.No. 275/ 138/91-IT(B)] dated the 14th November, 1991 (See [1991] 192 ITR (St.) 254), on the above subject.

2. According to the provisions of section 194C of the Income tax Act, 1961, any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on income comprised therein. The bodie are:

(a) the Central Government or any State Government, or

(b) any local authority, or

(d) any company; or

(e) any co-operative society, or

(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or both; or

(g) any society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India; or

(h) any trust; or

(i) any University established or incorporated by or under a Central, State or Provincial Act, and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956.

3. Similarly, when a contractor makes a payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1% of such sum as income-tax on income comprised therein.

4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates:

(i) in a case where the payee is a non- corporate resident person - 12%

(ii) in a case where the payee is a domestic company - 15%

5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.

5.2 Further, where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer in Form No.13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.

6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting tax at source under section 194C are briefly as follows:

(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner (vide rule 30 of the Income-tax Rules, 1962). In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable to action in accordance with the provisions of section 201. Sub-section (1A) of section 201 lays down that such person shall also be liable to pay simple interest at fifteen per cent. per annum of the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years and with fine.

(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that tax has been deducted and to specify therein the amount so deducted and certain other particulars. The certificate has to be furnished in Form No.16B within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Form No.16B is printed by the Central Government and can be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish a certificate as required under section 203, he shall be liable to pay by way of penalty under section 272A, a sum which shall not be less than Rs.100 but which may extend to Rs.200 for every day during which the failure continues.

(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the tax-deduction account number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are available in Board's Circular No.497 (F.No.275/118/87-IT(B)) dated 9-10-1987 (See [1988] 169 ITR (St.) 54). If a person fails to comply with the provisions of section 203A, he shall be liable to pay by way of penalty under section 272BB, a sum up to Rs.5,000.

(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source from payment to a contractor or sub-contractor, shall, prepare and deliver by the 30th June, following the financial year an annual return of deduction of tax under section 194C. This return is to be furnished, in Form No.26C, to the designated concerned Assessing Officer. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty under section 272A, a sum which shall not be less than Rs.100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.

7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, have to be consulted. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be approached.

8. The contents of this Circular may please be brought to the notice of all concerned.

9. Copies of this Circular will be available with the Directorate of Inspection (RSP & PR), 6th Floor, Mayur Bhavan, Connaught Place, New Delhi-1.

(Sd.) Rajesh Chandra,

Under Secretary to the Government of India.